Currency Substitution in Developing Countries: An Introduction

ByGuillermo Calvo, Carlos A. Végh Gramont

May 1, 1992

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.

Subject: Currencies, Demand for money, Dollarization, Foreign exchange, Inflation, Monetary policy, Money, Prices, Real exchange rates

Keywords: Currencies, currency substitutability, currency substitution, currency-substitution problem, Demand for money, Dollarization, dollarization process, domestic money, foreign currency, Inflation, inflation rate, medium of exchange, nominal interest rate, Real exchange rates, substitution hypothesis, WP

Pages:
32
Volume:
1992
DOI:
https://doi.org/10.5089/9781451845884.001
Issue:
040
Series:
Working Paper No. 1992/040
Stock No:
WPIEA0401992
ISBN:
9781451845884
ISSN:
1018-5941

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